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The Federal Reserve Bank of New York today released Financial
Globalization and the U.S. Current Account Deficit, the latest article in its
series Current Issues in Economics and Finance.

From 1999 though the end of 2006, the United States financed a string of large
current account deficits by borrowing $4.4 trillion from other countries—a
sum amounting to 85 percent of total net borrowing worldwide. Despite
this heavy net borrowing, the United States has been the destination of only
about 30 percent of total gross cross-border investments by other
countries. This figure is proportionate to the U.S. share of global GDP and
is even below the U.S. share of global equity and bond markets, according to
authors Matthew Higgins and Thomas Klitgaard.

The striking divergence between the shares of gross and net flows going to
the United States can be reconciled by noting that this was also a period of
rapid financial globalization, with countries investing a record fraction of
their saving abroad. This sharp increase in global cross-border investment
made it possible for the United States to be the world’s principal net
borrower while receiving an unremarkable share of other countries’ gross
external investments. Significantly, the recent rise in U.S. cross-border
investment has lagged the rise abroad. According to the authors, this
shortfall has allowed the United States to finance its current account deficit
while taking in a smaller share of other countries’ external investments.

Looking forward, the authors argue that it might be harder to finance continued
large U.S. current account deficits on favorable terms if the recent wave of
financial globalization were to subside or if U.S. investors were to invest
a larger share of domestic saving abroad.

Matthew Higgins and Thomas Klitgaard are assistant vice presidents at the
Federal Reserve Bank of New York.